CHAPTER 14

Determining the Best Price

Price as a Marketing Tool

Price is the value of money (or its equivalent) placed on a good or service.

Price is the amount of money a customer must pay for a product.

Price is one of the 4 elements of the marketing mix, (the 4 P’s): product, price, place (distribution), and promotion.

Frameworks 7.1

Price as a Marketing Tool

Pricing is defined as establishing and communicating the value of products and services to prospective customers.

The price of a product can be adjusted much more quickly than other marketing decisions.

Frameworks 7.2

Price as an Economic Concept

If there is a small supply of a product or service (real or perceived) but a very large demand, the price will usually be quite high. This called a shortage or a seller’s market.

Price as an Economic Concept

If there is a very large supply of a product or if demand is low, the price will be low. This is called a surplus or buyer’s market.

Price as an Economic Concept

The concept of economic utility demonstrates that value is added through changes in: Form Utility Time Utility Place Utility, and Possession Utility

In other words, the more value added to a product, the more desirable that product is to consumers. Frameworks 4.3

Price as an Economic Concept

Elasticity of demand describes the relationship between changes in a product’s price and the demand for that product.

With inelastic demand, a price decrease will decrease total revenue.

With elastic demand, a price decrease will increase total revenue.

Frameworks 4.7

Products with Elastic Demand

Most products will experience a change in demand when the price increases or decreases.

Steak is not a necessity and has many substitutes.

Frameworks 4.7.1

Products with Inelastic Demand

Some products will NOT experience a change in demand when the price increases or decreases.

Insulin for a diabetic is a necessity and does not have a substitute. Frameworks 4.7.1

Products with Inelastic Demand

The law of diminishing marginal utility states that consumers will buy only so much of a given product, even though the price is low.

Some products will have inelastic demand, not because they are a necessity, but because the price is very low and you use very little of the product.

Government’s Effect on Prices

The government attempts to prevent unfair competition by regulating businesses, prohibiting unfair pricing, and using taxation to discourage or encourage certain behaviors.

New products are protected from competition with patents granted to inventors for a period of 20 years.

The patent allows the inventor to have greater control of the price charged for the product.

Can Human Genes Be Patented?

More About Patents

A famous inventor you’ve never heard of: Forrest Bird

The Bird Mark 7 Respirator

Is This Price Discrimination?

Video: Hospitals: Is the Price Right?

Regulating Prices

Price Fixing – Business can not cooperate to establish prices.

Price Discrimination – Businesses cannot charge different prices to other businesses. All discounts must be offered to everyone.

Price Advertising – Misleading advertising is prohibited.

Regulating Prices Bait-and-Switch – Businesses may NOT

advertise a low priced product with the intention of selling the consumer a higher priced product when the customer visits the store.

Unit Pricing – Some states require that the self tag indicate the price per ounce or pound.

Taxation Effects Prices

An increase in the tax on a product makes it less attractive to consumers.

High taxes on tobacco and alcohol products are designed to discourage use of those products.

By lowering taxes on alternative fuels, such as ethanol, the government hopes to encourage the use of those products.

Setting Pricing Objectives

Maximize Profits – The business carefully studies the target market to determine what customers will pay for the product.

Increase Sales – The business wants to have the highest possible sales volume. This usually means low prices and a large share of the market.

Maintain an Image – Many consumers believe that high prices equal higher quality.

Determining the Price Range

In order to set an effective price, maximum and minimum prices for the product must be determined.

To determine the minimum price all production, marketing, and administrative costs must be calculated.

The breakeven point is the quantity of a product that must be sold for total revenues to match total costs at a specific price.

Determining the Price Range The breakeven point is calculated using:

Fixed Costs: The costs to the business that do not change no matter how many products are produced. Examples: Insurance, Rent

Variable Costs: Those costs that are directly related to the quantity of the product produced. Example: cost of materials and labor.

Total Costs: Fixed and Variable costs combined. Product Price: The price at which the product is

sold. Total Revenue: The anticipated quantity of the

product that will be sold multiplied by the product price. Frameworks 7.4

Calculating a Selling Price

Selling price is the price charged for a product or service.

Product cost is the cost to the business of producing, or buying, the product.

Gross margin is the difference between the cost of the product and the selling price.

Operating expenses are all the costs associated with actual business operations. Examples include buildings, equipment, utilities, salaries, taxes, and other business expenses.

Frameworks 7.4

Calculating a Selling Price

Net profit is the difference between the selling price and all costs and operating expenses associated with the product sold.

A markup is an amount added to the cost of a product to determine the selling price.

A markdown is a reduction from the original selling price.

Frameworks 7.4

Pricing Based on Market Conditions

Price Skimming – is setting a very high price designed to emphasize the quality or uniqueness of the product.

This usually results in higher profits, but attracts many competitors.

Frameworks 7.3

Price Skimming Estee Lauder’s Creme de la Mer costs

as much as $165 for 2 ounces.

Frameworks 7.3

Video: Is Face Cream Worth the Price?

Pricing Based on Market Conditions

A penetration price strategy is setting a very low price designed to increase the quantity sold of a product by emphasizing the value.

Used to attract a large share of the market early and discourage competition.

Frameworks 7.3

Price Penetration Strategy

A price penetration strategy is often necessary to introduce a new brand in an already crowed

product category.

Price Vs. Non Price Competition

Price competition focuses the competitive strategy only on the product’s price.

Non-price competition de-emphasizes price by developing a unique product or service offering. Non-price competitive factors also include

services unrelated to the product’s price. Examples include delivery, gift wrapping,

knowledgeable sales staff, product selection, credit terms, convenience of location, unique shopping environment, and hours of operation.Frameworks 5.4.2

Pricing Strategies A one-price policy means that all

customers pay the same price. There is no negotiation concerning the product’s price.

Frameworks 7.3

Pricing Strategies A flexible pricing policy allows

customers to negotiate the price of the product.

Frameworks 7.3

Pricing Strategies Price

lines are distinct categories of prices based on differences in product quality and features.

Frameworks 7.3

Pricing Strategies Price bundling is the practice of

combining several related services for one price.

Frameworks 7.3

Pricing Strategies Psychological pricing refers to techniques that create an

illusion for customers or that make shopping easier for them. Common psychological pricing techniques are:

Odd-even pricing involves setting prices that end in either odd or even numbers. Odd numbers convey a bargain image; even numbers convey quality.

Prestige pricing involves setting higher-than-average prices to suggest status and prestige.

Multiple-unit pricing involves pricing items in multiples to suggest a bargain and increase sales volume.

Loss-leader pricing provides items at cost to attract customers.

In special-event pricing, prices are reduced for a short period of time, such as a holiday sale.

Everyday low prices (EDLP) are low prices that are set on a consistent basis with no intention of raising them or offering discounts in the future. Frameworks 7.3

Odd –Even Pricing

Frameworks 7.3

Prestige Pricing

Frameworks 7.3

Favorite Paperbacks – Buy 2 Get the 3rd Free

Stock up on bestsellers you've always meant to read, great biographies and memoirs,

fascinating works on history and culture, and much more

from our collection of favorite paperbacks below. For a limited

time only, buy two, and get a third free! The discount on your

free book will be taken at checkout. This promotion is also available in Barnes &

Noble stores.

Multiple Unit Pricing

Frameworks 7.3

Every Day Low Prices In an attempt to

remove price as a factor in the buying decision, many companies promise to match competitor’s prices.

Frameworks 7.3

Loss Leader Pricing

Frameworks 7.3

Pricing Strategies

FOB pricing identifies the location of from which the buyer pays the transportation costs and takes title to the products purchased.

FOB Factory means that the customer pays all transportation costs from the point where the product is manufactured.

FOB means “free-on-board.”

Pricing Strategies

Discounts and allowances are reductions in a price given to the customer. Quantity Discount – Offered to

customers who buy in large quantities. Seasonal Discounts – Offered to

customers who buy during times when normal sales are low.

Cash Discount – Offered to customers who pay in cash or pay their invoices quickly. Example: 2/10, Net 30 Frameworks 7.1

Pricing Strategies

Discounts and allowances - continued Trade Discount – Reductions in price

offered to businesses at various levels in a channel of distribution.

Trade-in Allowance – Reduction in price in exchange for the customer’s old product when a new one is purchased.

Advertising Allowance – Price reduction or specific amount of money given to channel members who participate in advertising the product.

Frameworks 7.4

Pricing Strategies

Discounts and allowances - continued Coupon – Price reduction offered by

channel member through a printed promotional certificate. This is a common sales promotion activity.

Rebate – Specific amount of money returned to the customer after the purchase is made.

Offering Credit

Credit allows a business or individual to obtain products or money in exchange for a promise to pay later. Credit makes it possible for expensive purchases to be made.

Consumer credit (retail credit) is credit extended by a retail business to the final consumer.

Trade credit is credit offered by one business to another business.

Offering Credit Bank credit cards, such as VISA and

MasterCard, are issued by banks. The bank receives a fee from the retailer (2%-

5% of the purchase price) for guaranteeing payment.

Other fees include interest on unpaid balances, services charges, and membership fees.

Offering Credit Some businesses are big enough to offer their

own consumer credit cards. These business handle all of their own credit

processing and billing. These credit cards generate extra revenue and

help build customer loyalty toward the business.

Offering Credit A debit card looks like a credit card, but

it allows the funds to be electronically transferred from the customer’s account to the business’s account.

Offering Credit A regular charge account allows

customers to charge purchases during a month and pay the balance in full at the end of the month. There are no finance charges, this is offered as a service to customers.

Offering Credit Installment accounts allow customers to pay

for large purchases, at a set interest rate, with equal monthly payments over a specific period of time. These are usually secured loans.

Offering Credit Revolving credit allows customers to continue to

charge on the account, up to the credit limit, as long as the minimum monthly payment is made.

The minimum monthly payment will change as the account balance changes.

These accounts are usually unsecured loans.

Offering Credit In a secured loan, something of value,

such as property, cars, or machinery is pledged as collateral, or security against the loan.

An unsecured loan is simply a written promise to repay the loan. These do not require any security.

If the borrower does not repay the loan, only in a secured loan situation can the security (or collateral) be repossessed.

Offering Credit

A business that plans to offer credit must consider the customer’s: Credit History Available Resources Capacity to Repay

the Loan

Offering Credit Effective collection procedures are an

important part of the business’s credit plan. Most businesses will have a small

percentage of their accounts that must be actively collected.

Video: Identity Theft

Approximately 15 million United States residents have their identities used fraudulently each year with financial losses totaling upwards of $50 billion.

End of Chapter 14: Determining the Best Price

Test